IRS Problems

No one wants to be audited by the IRS. Sometimes IRS audits are warranted and other times they simply happen to people who really didn’t deserve it. However, there are ways to minimize your risk of an IRS audit. Here are nine to keep in mind as you organize your finances and work with your CPA.

1. File Accurate Returns

One of the most common red flags that come up is returns with mistakes. Granted, it’s complicated to fill out tax forms, which is why most people use a CPA. In any case, making sure that your tax return is filled out completely and accurately will help to minimize your chances of being audited by the IRS.

2. Keep Detailed Records

Hopefully, you’ll be giving all your final numbers to your CPA for filing, and not try to go it alone. But all those numbers need to be backed up by detailed records. By maintaining records of all income, deduction claims, credits and expenses, you can ensure that you have proof that they’re valid if the accuracy of your return is ever questioned by the government. Sometimes the IRS will ask for some verification if something is questionable on your return. If you have the backup readily available, that’s often the end of it. Otherwise, the next step might be an audit.

3. Report All Income

Make sure to report all sources of income, including wages, self-employment income, interest, dividends, and any other income received during the tax year. If you fail to report certain income, you could leave yourself open for an IRS audit. This is especially the case if someone who paid you files their return and reports your income. So if the numbers don’t add up, your return will be flagged. Now, there will be an opportunity for you and your CPA to file an amended return, but it’s definitely not helpful to be singled out like that, especially for failing to report certain income.

4. Stay Current With Tax Laws

Tax laws seem to be ever-evolving, and it’s almost like the IRS purposely makes things confusing. Still, taxpayers are supposed to stay up-to-date with tax laws to ensure compliance. For most folks with families and lives to live, it’s too much to try to decipher changing tax laws every year. That’s why it makes smart sense to hire a CPA to handle your taxes for you. Your CPA is always up-to-date on tax laws, so you don’t have to worry about it personally.

5. Avoid High Risk Activities

Minimize activities that are commonly associated with higher audit rates, such as excessive business expenses and large charitable contributions relative to income. Like it or not, certain business activities can raise red flags too, such as doing business with entities in certain countries, taking deductions for activities related to certain foreign countries and more. Finally, dealings in unusual assets like NFTs and crypto may raise eyebrows, even though technically they’re legal. If you are involved in activities that tease the line of what’s legal, make sure you are completely above board and keep all of your records very organized.

6. Report Foreign Assets

Speaking of foreign countries, if you do have foreign financial accounts or assets, comply with the reporting requirements of the Foreign Account Tax Compliance Act (FATCA) and the Report of Foreign Bank and Financial Accounts (FBAR). If all this sounds new or complicated, you’re not alone. Your CPA can supply all the details you need and make sure that your tax returns are compliant.

7. Respond Promptly to IRS Correspondence

If you receive any communication at all from the IRS, respond promptly and provide any requested information or documentation. You never want to set the letter aside or put it out of sight, because you might forget about it. Deal with it as soon as you get it. If you’re unsure of what the letter means or what it implies, just forward a copy of it to your CPA, then follow up to discuss next steps. In fact, your CPA should be CC’d on all IRS correspondence, no matter how simple it may appear on the surface. Ignoring IRS correspondence can escalate the situation and greatly increase the likelihood of an audit.

8. File on Time

Many people believe that if they wait and file with an extension, they will reduce their chances of being audited. Their reasoning is that the IRS will audit only a certain number of returns, chosen from a pool of returns submitted by the first deadline. However, there’s no proof that this is true. Whether you file your personal return by April 15th or by the extension deadline of October 15th, your odds of being audited probably have very little to do with it. Just make sure that you file on time in April, or on time in October if you need the extension. Missing deadlines will certainly make your return stand out from others that were submitted on time, and that will almost certainly increase your chances of an IRS audit.

9. Be Transparent

If you do get questioned by the IRS, be totally honest and transparent. Disclose any errors or discrepancies on your tax return and work with your CPA to resolve them promptly.

If you take these steps, then your chances of being audited by the IRS may be reduced, but there are no promises. Working with a CPA will greatly help ensure that you’re filing accurate returns on time and only taking legal deductions. Get in touch with your CPA to learn more.

by Kate Supino

Being notified that you’re going to be audited is never good news. But it doesn’t have to keep you up at night. Although it can be a stressful and challenging process for you or your business, there are things you can do to prepare mentally, emotionally and in a practical way. Just go through the steps below to get through an audit successfully.

Realize That It’s Not Personal

Keep reminding yourself that an audit is a very routine process. It’s not a personal attack on you. In fact, odds are that some giant computer spit out your name along with thousands of others and selected you for a random audit. The purpose of an audit is not to catch you doing something wrong, but rather to verify that your records and financial processes are accurate and compliant.

Determine The Scope of The Audit

Audits are limited in nature. Review your notification letter. Somewhere at the top, it will indicate what year or years that you’re being audited for. This alone may make you feel better, as you’ll only need to gather documents for the year that’s being reviewed. Your auditor won’t be reviewing anything other than what falls within that scope of time.

Contact Your CPA

Next, forward a copy of the audit notification letter to your CPA. After a day or two, give your CPA a call to make sure they received it and to formulate a plan to prepare for the audit. Depending upon your CPA and your arrangements, the CPA may want to be there in person for the audit, send a representative or allow you to handle it yourself.

Review the Details of the Audit Process

Sometimes audits take place in person. Other times, you’ll just be asked to submit documents, which will be reviewed internally by the IRS. In many cases, simply mailing in requested documents will take care of the audit. In other cases, either more information will be requested, or an in-person audit will be scheduled.

Assign a Point Person

Someone needs to be assigned to be the primary contact for the auditor, if the audit will be taking place in person. This could be you, your CPA or a trusted admin official in your business. Whoever it is, they should be knowledgeable about the subject matter and able to answer the auditor's questions fully and in a reasonable timeframe. If it’s a business audit, the point person can coordinate with other staff members to provide any necessary documents and answer questions, ensuring that the audit goes smoothly.

Be Honest

It’s important to be transparent and straightforward in all communications with your auditor. Answer their questions truthfully to the best of your ability. Provide accurate information, and don't withhold any relevant information. Avoid being coy, clever or humorous with your answers. If you don't know the answer to a question, it's okay to say so. Don’t feel pressured to make up answers or provide information that you're not absolutely certain about. If the auditor doesn’t get what they feel is a satisfactory answer, they’ll make a note to follow up on it later, after you’ve had a chance to retrieve any necessary supporting documentation.

Take Your Time

Auditors don’t expect you to have every single receipt and piece of paper or digital file at your fingertips. They understand that it can take time to remember where you filed something, and that records are rarely perfect. When asked to show something that you can’t quite recall filing, take your time. Stay calm and think about where you might have put something like that. For example, during the course of any year, you might have one-off pieces of paper that don’t fall into ordinary filing categories. It can be hard to find things like this when you feel like you’re being watched by an IRS official. It’s fine to tell them it’s going to take a little bit more time to find that particular document. Again, they’ll just make a note to follow up on it later.

Don’t be Argumentative

If your auditor finds a discrepancy, don’t agree or disagree. Just indicate that you understand they found a discrepancy. The auditor may give you a chance to explain your actions, in which case you should do so in an objective tone of voice that’s not defensive or argumentative. Use phrases such as, “According to my understanding…,” and “I believed this to be the correct way to…” etc. You want to maintain a business-like rapport with the auditor and be neither confrontational nor argumentative.

Remember the Auditor’s Role

Remember that the auditor is there to help you comply with the tax code. They aren’t looking to punish you. They’re just doing a job. At the end of the day, they’re going home to their family just like you do. In fact, the auditor that you encounter likely doesn’t have final say in the audit. Chances are that their work has to be reviewed by a higher-up to be sure it’s accurate. When you think of it this way, it might make you feel better about being on even ground with the auditor.

Rely on Your CPA

Whether or not your CPA is there in person to get you through the audit, you can rely on them to help you as the audit progresses. You can contact them intermittently to let them know how the audit is going, or to ask questions. Your CPA has been through countless audits and they can tell you their opinion about your audit.

Ultimately, you may have fewer chances of receiving an audit notification in the first place if you use the services of a CPA. But if you do get an audit notification, hopefully these tips will help you to get through it more calmly and with less worry on your part. Remember, if worse comes to worst, you may owe more money to the IRS. And if that happens, your CPA can help you to manage that, too.

Most people keep a copy of their tax returns after they file. And, if they don’t retain a copy themselves, they may rely on their CPA to keep a copy. But sometimes, you may need a tax return from many years ago and a copy isn’t immediately available. Another situation might arise where the third party that’s requesting your old tax return won’t accept it directly from you. The reasoning behind that is that they need verification that the document has not passed through your hands into theirs. This helps to ensure that the return is authentic and hasn’t been tampered with.

There is a difference, though, between an old tax return and a tax transcript. The tax return is, of course, the official document that your CPA files with details of your financial information and calculations for taxes and other pertinent data. A tax transcript is a different kind of document that proffers certain information in a summarized form. Depending upon what kind of tax transcript it is, it will have the financial information that’s relevant to the purpose for which it’s requested. In most cases, when a third party requests IRS documents, it’s a tax transcript, not the actual tax return, that they are asking for.

What Are the Different Kinds of Tax Transcripts?

There are five variations of tax transcripts:

1. Tax Return Transcript
This is the most similar to the actual tax return, but still different. It has most of the line items, schedules and forms from your tax return. If you filed an amended tax return after your original filing, the tax return transcript may not reflect those changes.

2. Tax Account Transcript
This variation does reflect changes made after filing an original tax return. It also shows a summary that includes filing status, marital status. taxable income, return type (Form 1040, 1040A or
1040EZ), payment types and adjusted gross income.

3. Record of Account Transcript
This type of tax transcript is actually a combination of the actual tax return, plus the tax account transcript noted above.

4. Verification of Non-Filing Letter
This is a formal letter from the IRS that they did not receive a tax filing for the requested year. Note that it doesn’t state whether or not you were actually required to file for the year in question.

5. Wage and Income Transcript
This is another kind of verification in the form of a transcript that states your wage and income data for the requested year.

Reasons For Requesting a Tax Transcript

Many situations arise in life where a third party might request that you provide them with a tax transcript. Some of the most common are:

You Wish To Be Considered An Accredited Investor

An accredited investor status is required in order to make certain types of investments. This status assures the third party that you are financially able to withstand losses should they occur from your investment with that third party. As recommended by the federal government and the Securities and Exchange Commission (SEC), only a subset of investments, such as hedge funds, certain private placement agreements, and similar deals, need accreditation. The SEC rules are not meant to be exclusive; rather, they are there to safeguard regular people from risking their savings and hard-earned money on investments they may not fully comprehend. The code of federal regulations outlines the meaning of an accredited investor. A third party, where you wish to invest, may request a tax transcript in order to comply with those regulations and grant you accredited investor status.

You’re Applying For a Mortgage

Traditional mortgage lenders may request a tax transcript to verify your stated income and to qualify you for the mortgage. This is the case whether you apply online or in-person. Of course, there are hard money lenders and no-qualifying lenders, but those are a different story, with a different set of qualifiers.

You’re Applying For Financial Aid

If your son or daughter is applying for financial aid, their college of choice will need your verification of income; typically in the form of a tax transcript. In most cases, they will request the tax return transcript, but not always.

You’re Requesting a Change to Child or Marital Support

If you pay child or marital support and your income has changed since the original court ruling, you may be asked to provide a wage and income transcript to demonstrate the changes to your household income.

You’re Applying For a Rental

If you work for yourself, the new landlord may ask for proof of your income. In that case, a record of account transcript will usually satisfy their requirements.

You’re Buying Real Estate Overseas

If you’re attempting to purchase a property in another country, you’ll likely need to provide the foreign lender with official documentation of your income. The tax account transcript would certainly meet their needs.

You Want to Retire Overseas

If you plan to retire in certain countries as an American citizen, you may need to satisfy their minimum income requirements in addition to savings account minimums in order to get a resident visa. They will inform you as to what specific financial information they need, but a wage and income transcript may fit the bill.

How to Get a Tax Transcript

There are companies that offer services to get a tax transcript. However, you can obtain a tax transcript at no charge directly from the IRS website. If you are confused about what to order and how to order, your CPA can assist you with the process. Expect a delay of between four to six weeks, so be sure to place your request as soon as possible to avoid disappointment. Finally, be sure to find out ahead of time whether the tax transcript needs to be delivered straight into the hands of the requesting party, or if you should take delivery of it first.

Last, if you didn’t file a tax return for some valid reason, you can simply request the afore-mentioned verification of the non-filing letter. As always, consult with your CPA for questions about this and other tax-related matters.

When you go to your mailbox and find you have received an IRS letter or notice, you may be stricken with panic and fear. However, the IRS sends out millions of letters and notices to taxpayers annually due to various reasons and situations. While it's possible you could be facing a serious financial situation, most letters and notices can be handled without you ever having to visit an IRS office in person. Should you receive an IRS notification letter, here's what you need to know.

Why You Might Receive a Notification Letter

As stated earlier, the IRS sends out notification letters for many different reasons. Some of the most common include informing you of a balance that is due, being due a tax refund that is either larger or smaller, needing to verify your identity or other important information, or having questions about your tax return. In some situations, you may receive a notification letter because the IRS is informing you that the agency changed your tax return, or that there will be a delay in processing your return. Whatever the reason, if you have questions that need to be answered as quickly as possible, it is best to schedule a meeting with your CPA and let them look over the letter to see what steps need to be taken next.

Read the Letter Carefully

Whenever the IRS sends you a notification letter, be aware that it will contain valuable information and should be read over very carefully. For example, if the IRS sent you a notice telling you it changed your tax return, compare the information provided in the letter with that which is contained on your original tax return.

Explaining the Reason for the Notification

As you read the letter, it will explain why it was sent and provide you with instructions as to how you should proceed. Should your letter ask that you respond by a certain date, do so. If you fail to comply, you may find yourself facing additional interest charges and penalties, and losing your right to appeal the agency's decision about your tax matter.

An Individual Reply May Not be Needed

Most of the time when letters such as these are sent to individuals, the good news is that the IRS rarely requires that you reply to the notification. If you agree with a correction made by the IRS or other things stated in the letter, you won't need to reply. However, if your letter states that a payment is due to the IRS or you are given instructions to reply, don't ignore the instructions. In cases such as these, it is probably best if you meet with your CPA to discuss your situation and learn of various options you may have to resolve the matter.

Respond Even if You Disagree

Even if you disagree with a correction made by the IRS, respond to the letter as soon as possible. When you do, include a written explanation as to why you disagree, any documentation you want the IRS to consider regarding your case, and don't forget the tear-off portion on the bottom of your letter. Upon mailing it to the IRS, expect to wait at least 30 days for a reply.

Pay What You Can

If the IRS is demanding payment, pay as much as you can as soon as you can. If you can't pay the total amount, you can apply for an Online Payment Agreement or Offer in Compromise, both of which will help you avoid or reduce your penalties. Since this can be a complex matter, it may be best to turn this over to your CPA.

No Office Visit Required

Fortunately, most IRS correspondence can be resolved without having to visit an IRS office in person or even making a phone call. But should you need to speak to an IRS representative, call the phone number in the notice's upper-right portion. When you do, make sure you have a copy of your tax return and the letter sent to you by the IRS.

Keep Copies of Everything

When you get an IRS notification letter, immediately make sure you keep it in a safe place with your tax records. Depending upon the situation addressed in the notification, you may need to reference the letter, your tax returns, and other documents in the coming weeks or months.

The IRS Does its Business by Mail Only

When it comes to taxpayer accounts or tax returns, the IRS does not ever use email to send you a letter or notification about anything. Instead, it relies on the U.S. Postal Service to deliver its notification letters to taxpayers. Therefore, if you think your letter looks suspicious, you get emails claiming to be from the IRS, or you go online to the IRS website and get no search results regarding a letter or notice, you need to take action immediately. Due to the possibility of identity theft, call the IRS at 800-829-1040 or report your issue on the Report Phishing page found on IRS.gov as quickly as possible. If you do need to report anything, always include the notice or letter number found on the correspondence.

A Contact Phone Number is Always Provided

Since it is always possible you may need to respond to a notification letter or have questions about the information it contains, any IRS correspondence you receive in the mail will have a contact phone number for you to call if necessary. In most cases, it will be located in the letter's top right-hand corner. But remember, you should only need to contact the IRS if you have a balance due, need to send the agency additional information, or you disagree with the contents of the letter.

Should you be holding an IRS notification letter in your hand, it is important you get answers to your questions before moving forward. Therefore, meet with your CPA so that they can look over the notification letter, explain your options, and give you advice you can trust.

No one wants to go through an IRS audit. These days, an audit happens when the IRS thinks that the tax money they could recoup from an audit exceeds the cost of performing the audit itself, or if they believe there may be criminal activity involved. As long as you’re doing everything right, there’s no specific reason to worry about an audit. However, sometimes even if you think you’re doing everything right, you may accidentally raise some red flags. Following are seven things that could inadvertently trigger an IRS audit.

1. Unusual Business Expenses

As a business owner, you’re entitled to a number of tax deductions that ordinary taxpayers aren’t. You can deduct things like office supplies, business travel expenses and even certain meals. However, there are a host of other business expenses that are dubious when it comes to taking a deduction. For example, except under specific circumstances, you probably can’t deduct tickets to entertainment events, donations from which you personally benefit, commuting expenses or all those generous cash tips you gave to hotel housekeeping during the year. If you do have unusual business expenses that you’re pretty certain you should be able to deduct, be careful about keeping your receipts and be sure to run them by your CPA.

2. Sharp Decline in Income

If you’ve been in business for a number of years with steadily increasing income, you’ve set a pattern. But if one year you all of sudden report a sharp decline in income, this raises a red flag that could result in an audit. The reason is that the IRS has a general idea of what you should be making according to your profession and level of experience. Anything that falls far below the norm may raise some alarm bells. Now, there may be a good reason why you earned less; maybe you are transitioning into retirement or you had some health issues that prevented you from working as much as you did previously. But if everything else is the same, you should be ready to explain why you’re only reporting a fraction of your normal income.

3. Above Average Itemized Deductions

As your CPA has no doubt advised you, it’s often more advantageous to take itemized deductions than to take the standard deduction. Purportedly, the IRS knows the average amount of itemized deductions that someone in your tax bracket takes. If your itemized deductions are far above the average, someone in the Internal Revenue Service may want to take a closer look. As long as your itemized deductions are legitimate, you don’t have anything to worry about. Just be aware that this is something that could raise a red flag.

4. Unreported Income

Let’s say that you’re a business owner and you’re vigilant about filing accurate tax returns every year. One year, business is slow so you take on some side work for a little extra money, and you receive a 1099 or a W-2 in January. It’s so small that you don’t bother to tell your CPA about it and it doesn’t get reported on your business or personal tax returns. You need to know that even if you didn’t report it, the employer did send in a copy of the 1099 or W2 to the IRS. Things are not going to match up on the IRS’s end, and this is going to raise a red flag. Neglecting to report this income will raise your risk of an audit.

5. Being a High Earner

Unfortunately, the simple fact that you make more than $200,000 makes you a bigger target for a tax audit. According to statistics, those who earn over that amount are about four times more likely to be audited. You can’t do anything about that, but you can make sure that your tax returns and backup are in meticulous order. If you are audited, don’t give the IRS any reason to penalize you.

6. Not Reporting Cryptocurrency Earnings

Cryptocurrency may not be in “official” dollars and cents, but it counts the same in the eyes of the IRS. Cryptocurrency earnings are taxable in the eyes of the law, so be sure to keep excellent records and report your profits on your tax returns. Your CPA will likely have some advice as how to best track and record your cryptocurrency earnings.

7. You Made an Honest Error

There’s no harm in doing your own tax return, except when there is. The IRS doesn’t mind if anyone does their own taxes as long as they are accurate. But when you make one or more errors on your return—even if they are honest mistakes—that’s when the IRS sits up and takes notice. Even honest errors will get flagged for a closer look. If the IRS gets the impression there are more mistakes in your return, odds are high that you’ll be notified of an audit. It’s always a good idea to have a CPA do the final preparation of your taxes, even if you like to do a rough draft yourself. That way, you know that a professional is looking over all the numbers so that by the time it gets to the IRS, everything is as accurate as possible.

There are rumors that the IRS doesn’t do as many audits anymore because of lack of funding. That may or may not be true, but you can count on one thing; if the IRS gets wind of any of the red flags mentioned above, they’ll find the resources to audit the taxpayer if they feel it’s necessary. Always take your tax returns very seriously and be careful about tracking your personal and business expenses and income throughout the year. When you do this, filing your returns will be more straightforward for both you and your CPA and you can be confident that the information on your returns is correct to the best of your knowledge. At the end of the day, that’s all the IRS asks of you.

In these days of the gig economy, more business owners are leveraging the affordability and convenience of hiring freelancers (independent contractors) instead of regular employees. It makes sense. There are some tremendous benefits to hiring independent contractors (ICs), including not having to pay for insurance and payroll taxes. Another huge benefit to hiring ICs is that business owners can’t always predict busy times and downtimes. When seasonal shifts in business necessitate extra help, the business owner can bring on more staff without making any long-term commitments. As business slows down, the owner can simply let the ICs know their help isn’t needed anymore at this time. It seems like a dream come true from an employer standpoint.

However, there are strict IRS rules regarding classification of ICs. If you mistakenly or intentionally classify a worker as an IC when they should be classified as employee, you and/or your business would be held financially liable to the IRS and to the worker. The IRS isn’t setting you up just so they can catch you out. They have established a 20-Factor Test for employers to determine if a worker is classified as an IC or an employee.

What is the IRS 20-Factor Test?

The IRS 20-Factor Test is a self-administered “test” consisting of 20 factors for consideration. Based on the answers to those factors, an employer can more safely determine whether one or more of their workers is classified as an employee or an independent contractor.  

The IRS 20-Factor Test Explained 

The test is comprised of three general categories; behavioral control, financial control and relationship of the parties. It’s not a cut and dried test as in; this certain number of yes answers means one thing and this certain number of no answers means something else. It’s understood that behavioral control, financial control and relationship of the parties can be vague notions to define. In other words, an employer should do their best to answer truthfully while knowing that the answer can still be ambiguous. Interestingly, the 20-Factor test has been coined the “right to control test” because so many of the factors relate to employer control over the worker. A final note: The IRS doesn’t use this exact 20-Factor test anymore. However, they still use the principles behind it to decide whether or not your workers are employees or ICs. You can effectively use this test to help ensure you’re classifying your workers correctly and in good faith.

1. Amount of instruction

Does the employer dictate when, where and how the worker will complete the work? If so, the worker could be classified as an employee.

2. Amount of training

Is there a minimum number of training hours required before the worker is permitted to begin the job? Is the employer supplying the training? This suggests an employer/employee relationship.

3. Degree of business integration

Is the work heavily integrated with business operations? Is the success of the business heavily reliant on the satisfactory completion of the work by the worker?

This indicates that the worker is an employee rather than an IC.

4. Extent of personal services.

Must the work be performed by a certain person and no one else? ICs are typically free to outsource their work, whereas employees are expected to perform the work themselves.

5. Control of assistants

Does the employee have control over the worker’s assistants? Does the employer dictate who the worker uses as an assistant or even pay the assistant?  This suggests an employer/employee relationship.

6. Continuance of relationship

Has the worker been performing the same job and the same tasks for the same employer for an extended period of time? This could be an employer/employee relationship

7. Control over schedule

Does the employer dictate the hours or days when the work must be performed? This is likely an employer/employee relationship.

8. Demand for full-time work

Does the employer demand that the worker work a minimum number of hours that equates to full-time work? Since this would prohibit the IC from seeking work elsewhere, this would likely be considered an employer/employee relationship.

9. On-site requirements

Does the employer require the worker to perform the job at a certain physical location? Could the work practically be performed elsewhere instead? This is the marking of an employer/employee relationship.

10. Order of work

Is the schedule of the work to be performed dictated by the employer? This indicates a level of control that is more employer/employee than employer/IC

11. Reporting requirements

Does the worker have to check in with employer with status updates on the work being performed? Are written or oral reports a requirement? If so, the worker may be an employee.

12. Method of payment

How is the worker paid? Is there a particular payment schedule set in place, such as hourly, weekly, or monthly? ICs typically get paid in a lump sum once the work is completed

13. Compensation for business or travel expenses

ICs  typically bear their own travel and business expenses, whereas employees are usually entitled to some sort of compensation for business or travel expenses

14. Use of tools and materials

How does the worker get the work done? Is it with company-supplied tools and equipment or are they supposed to provide their own tools and equipment to complete the work? Employees typically use company equipment, whereas ICs are expected to provide their own.

15. Level of investment

ICs do not typically invest in the facilities where they perform work. Does the worker invest in the company premises? If so, they may be an employer rather than an IC.

16. Share in gain or loss

ICs do not share in profit or loss. Employees may be part of a profit-sharing plan.

17. Ability to work elsewhere

Is the worker able to work elsewhere? If not, they may be classified as an employee.

18. Availability to general public

Are the worker’s skills available for general hire to the public? If not, it’s more likely an employer/employee relationship.

19. Control over discharge

What are the circumstances under which the employer can withdraw offers to work? If there is a contract in place, it may or may not suggest in IC relationship with the employer.

20. Right to terminate

Does the worker have the right to turn down ongoing work? If so, that’s more of an IC/employer relationship.

If you hire ICs or a mixture of ICs and employees, go through each of these 20 factors. The answers may surprise you. If you end up just as confused as you when you started, consult with your CPA. They may be able to give you some insight from past experiences with other clients. And if all else fails, you can always contact the IRS for clarification on your particular circumstances.

There are few experiences that conjure such dread and stress as when a taxpayer has received notification from the Internal Revenue Service that he or she will undergo an audit of their tax returns.

Frankly, it feels like a punch in the gut when you first read those words.

In truth for most people, as CNBC notes, the chances of an audit are slim: of the nearly 148 million individual tax returns filed in 2016, just 0.7 percent (about 1 million) were audited, according to the IRS.

So that begs the question: what’s the item that increases your chances the most?

Making a lot of money. Period.

As the report goes on to say, if you earn more than $1 million, the audit rate jumps to 5.8 percent.

"This is one case where the less money you make, the better off you are," said Bill Smith, managing director at CBIZ MHM's National Tax Office in Washington. While getting contacted by the IRS regarding your return will not always result in owing more to Uncle Sam — sometimes it actually leads to a refund — it usually does mean you face additional taxes, according to IRS data. In 2016 alone, audits resulted in taxpayers forking over a collective $9.8 billion.

Turbo Tax notes that the Internal Revenue Service uses a combination of automated and human processes when selecting which tax returns to audit.

(It’s not a mindless machinery, in other words. There are human hands at the wheel.)

All tax returns are compared with statistical norms, and those with anomalies undergo three layers of review by personnel. Audits then occur either by mail or in meetings at taxpayers’ places of business. They can be unpleasant and are sometimes unavoidable. Certain red flags are sure to draw scrutiny and some are easy to sidestep—unreported income, for example. Others, such as high income, can’t be helped.

Another analysis confirms that less than 1 percent of tax returns get audited by the IRS, but this percentage varies significantly depending on several factors.

In fact, as noted in the link above, there are several red flags that make it far more likely you'll be audited; and there are a few that make it a near certainty.

Here's a list of 10 of the biggest IRS red flags and what you can do to prepare, as explained by The Motley Fool:

1. High income

Not surprisingly, the IRS dedicates more of its limited resources to ensuring that the highest-earning households pay all of their taxes. After all, if it catches a substantial error on the return of a taxpayer who earned $5 million last year, it's likely to bring in significantly more money than a mistake on the return of a $50,000 earner.

2. No income

In addition to looking at high-income returns, where the IRS feels it can get the best potential returns on its efforts, it also likes to examine returns that report little or no income.

3. Unreported income

Here's something that you may not know. When your employer sends you a W-2, or you get a 1099 from a company that paid you for your services, they also send a copy to the IRS. One of the checks the IRS does is to compare the information they've received with the numbers you reported on your tax return. If anything doesn't match up, you can expect to get a bill for the difference.

4. Business deductions that just don't make sense

According to Dave DuVal, chief consumer advocacy officer for TaxAudit, there are several ways that the IRS could potentially flag business expenses.

5. Itemized deductions that are way above average

The IRS knows how much money average people of certain income levels contribute to charity, pay for medical expenses, and so on. Any itemized deductions that are far above the average for someone in your income bracket can be a potential audit trigger.

6. Inflated rental property expenses

"Tax returns with what appear to be inflated rental expenses are frequently caught in the IRS net," says DuVal. "Not knowing the difference between a deductible expense and one that must be capitalized over a number of years could result in a disaster in an audit."

7. Filing status and dependency issues

A quick way to get audited is to claim a dependent who is also being claimed on someone else's return. "When two people claim the same dependent, the IRS gets involved. Although separated and divorced parents who have custody have the clear advantage, they still have to prove everything by providing birth certificates, school records, and more," says DuVal.

8. Not enough income to support your lifestyle

If you claim deductions that don't match your income level, it can be a potential audit trigger. For example, if you claim a deduction for the property taxes you paid on a new Porsche, a $200,000 boat, and a million-dollar home, and your income is $50,000, it could look like you may be hiding something.

9. 100% business use of a vehicle

It's quite rare to use a vehicle you own exclusively for business purposes, and the IRS knows this. Even if you own a car primarily for business purposes, it's likely that you'll occasionally use it to drive your kids to soccer practice, pick up groceries, or run other personal errands.

10. A Schedule C that reports just enough income to maximize the earned income tax credit

Having business income that you report on a Schedule C raises your risk of audit all by itself. Simply put, there's a lot of room for abuse when it comes to business deductions. Your audit risk goes up even more if your Schedule C has just the right amount of income and expenses to qualify you for a big credit, such as the Earned Income Tax Credit.

In conclusion, we highly recommend that you meet with your tax professional to assess your risk of audit and how that risk can be mitigated. The information provided above is not advice but is simply general information.

(Pursuant To IR-2018-66, March 21, 2018) Internal Revenue Service

Every year the IRS issues its “Dirty Dozen” report to highlight the biggest scams that the public needs to avoid.

The IRS has released the following press release:

This year's “Dirty Dozen” list highlights a wide variety of schemes that taxpayers may encounter throughout the year, many of which peak during tax-filing season. The schemes can run the gamut from simple refund inflation scams to technical tax shelter deals. A common theme throughout these: Scams put taxpayers at risk.

Taxpayers need to guard against ploys to steal their personal information. And they should be wary of shady promoters trying to scam them out of money or talk them into engaging in questionable tax schemes.

The following twelve scams are the ones to watch out for this year, according to the IRS:

1. Phishing: Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. (IR-2018-39)
2. Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2018-40)
3. Identity Theft: Taxpayers should be alert to tactics aimed at stealing their identities, not just during the tax filing season, but all year long. The IRS, working in the Security Summit partnership with the states and the tax industry, has made major improvements in detecting tax return related identity theft during the last two years. But the agency reminds taxpayers that they can help in preventing this crime. The IRS continues to aggressively pursue criminals that file fraudulent tax returns using someone else’s Social Security number. (IR-2018-42)
4. Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest, high-quality service. There are some dishonest preparers who operate each filing season to scam clients, perpetuating refund fraud, identity theft and other scams that hurt taxpayers. (IR-2018-45)
5. Fake Charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2018-47)
6. Inflated Refund Claims: Taxpayers should take note of anyone promising inflated tax refunds. Those preparers who ask clients to sign a blank return, promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund are probably up to no good. To find victims, fraudsters may use flyers, phony storefronts or word of mouth via community groups where trust is high. (IR-2018-48)
7. Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. (IR-2018-49)
8. Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their tax returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit. (IR-2018-54)
9. Falsifying Income to Claim Credits: Con artists may convince unsuspecting taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers should file the most accurate tax return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. (IR-2018-55)
10. Frivolous Tax Arguments: Frivolous tax arguments may be used to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. The penalty for filing a frivolous tax return is $5,000. (IR-2018-58)
11. Abusive Tax Shelters: Abusive tax structures are sometimes used to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2018-62)
12. Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. (IR-2018-64)

In conclusion, develop habits of caution and question anything that seems suspicious or too good to be true. The IRS reminds people that participating in illegal schemes can lead to significant fines and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.